| Strategic Alliances & Foreign Investments is the ultimate PDF for those looking to break into the Exporting market. Published by Infomat Inc., our editors help entrepreneurs plan and navigate their way to industry success! ABSTRACT
If your company is interested in delving further into the
international trade arena, licensing, joint ventures and
off-shore operations should be explored. While direct exporting
may be a profitable method of market entry for some businesses,
licensing to a foreign company manufacturing rights to your
product or setting up a foreign manufacturing joint venture may
be viable alternatives.
In comparison, setting up off-shore manufacturing operations
may be a more economical way of doing business: Kansas-based
Extru-Tech, Inc. is exploring this possibility:
"Because of the high cost of shipping our products and the
customs duties involved, we are seriously considering setting up
a manufacturing facility in the Far East, our biggest market,"
says Extru-Tech President Kenneth E. Matson.
This chapter will discuss the relative advantages and
disadvantages of alternatives to direct exporting, how to find
licensing and joint venture manufacturing partners and how to
finance overseas investment.
STRATEGIC ALLIANCES
Licensing
Licensing involves a contractual arrangement whereby a
company licenses the rights to certain technological know-how,
design and intellectual property to a foreign company in return
for royalties or other kinds of payment. This arrangement worked
well for a small business exporter from Virginia:
"We export our 'Peace Frogs' T-shirts directly to Japan, but
in Spain per capita income is lower, competition from domestic
producers is stronger, and tariffs are high, so we licensed a
Barcelona-based company the rights to manufacture our product,"
says Peace Frogs president Catesby Jones.
Licensing offers a small business many advantages, such as
rapid entry into foreign markets and virtually no capital
requirements to establish manufacturing operations abroad.
Returns are usually realized more quickly than for manufacturing
ventures.
The disadvantages of licensing are that control may be lost
over manufacturing and marketing, and more important, that the
licensee may become a competitor if too much knowledge and
know-how is transferred. Take care to protect trademarks and
intellectual property.
One way to help ensure that your intellectual property is
protected is to secure proper patent and trademark registration.
In the interim before your patent is filed, you may ask a
potential licensee to sign a confidentiality and non-disclosure
agreement barring the licensee from manufacturing the product
itself, or having it manufactured through third parties. Make
sure such agreements are not in violation of laws in the host
country.
Patents should be filed with the appropriate foreign
government within one year of U.S. filing, in order to obtain
patent protection under the Paris Convention, the international
agreement on patents. Patent rules vary from country to country,
so it is important to consult a competent international patent
and trademark attorney.
Licensing to a foreign company the rights to your product
will require a carefully crafted licensing agreement. Consulting
an attorney is critical since rules on licensing also vary from
country to country. Be careful that the agreement does not
violate host country antitrust laws. Under the antitrust laws of
many countries, the licensee cannot set the price at which a
product will be re-sold by the licensor.
Foreign Manufacturing Joint Ventures
In contrast to licensing arrangements, foreign manufacturing
joint ventures allow for the U.S. company to have a stake and
management role in the foreign operation. Joint ventures require
more of a direct investment than licensing and require training,
management assistance and technology transfer.
Joint ventures can be equity or non-equity partnerships.
Equity joint ventures are contractual arrangements with equal
partners. Non-equity ventures involve the host country partner
in the arrangement with a greater percentage. In some countries,
a joint venture is the only way for a foreign company to set up
operations. Laws often require that a certain percentage of
stock belong to a citizen of the host country.
Foreign manufacturing joint ventures are risky in that
geographical and cultural factors may interfere with the smooth
running of operations. You will have to deal with entirely new
management, located in a different country, whose first language
may not be English.
Despite the drawbacks, using a foreign partner can have many
benefits: the partner will have intimate knowledge of the target
market and may have business and political contacts to make
market entry easier.
Partner Selection Issues
Finding a suitable partner is critical to the success of any
licensing or manufacturing joint venture arrangement.However,
this can be a time consuming and difficult process without proper
assistance. Recognizing this fact, the United States government
has a special program to facilitate overseas partner selection.
The DOC Matchmaker Trade Delegations are an excellent way to
make joint venture and licensee contacts. Matchmakers provide
one-on-one pre-screened business appointments for U.S. companies
in a foreign country. One U.S. company which was particularly
successful as a result of a Matchmaker was Texas-based Made In
USA:
"As a result of a Matchmaker trade mission, I was able to
consummate a Finnish joint venture which resulted in $6 million
in sales," says Jan Schwenk, a principal with Made in USA, a
software development company. Exports now account for 25 percent
of the company's business.
A limited number of Matchmaker Trade Delegations are held
each year. For companies unable to take advantage of a
Matchmaker, you may consider the DOC's "Gold Key Service." For
U.S. firms planning to visit a country, US&FCS overseas staff
will assist in developing a market strategy, setting up
orientation briefings, making introductions to potential joint
venture partners, providing interpreters for meetings and helping
with follow-up planning. Fees vary from country to country.
The steps that can be involved in foreign partner selection
are as follows:
- Contact your local DOC office. Discuss your target
market and what kind of partner you are seeking. They can tell
you whether a Matchmaker program fitting your needs is scheduled.
If not, they will send your request to the appropriate Foreign
Commercial Service representative abroad.
- A list of potential partners will be forwarded to you.
Contact each one with letter of introduction.
- After responses from potential candidates are obtained,
conduct a financial and business reference check on the most
qualified candidates. If you are unable to do this in-house, use
a credit reporting firm.
- Make a trip abroad, either with a Matchmaker Trade
Delegation or individually, to meet with potential licensees or
joint venture partners.
- Having made your final selection, begin contract
negotiations with the assistance of legal counsel.
Foreign Investment Opportunities
Many companies find that, as a result of exporting
profitably and licensing or joint venturing the manufacture of
their products abroad, it becomes a more viable method of market
entry to set up off-shore production operations.
Having only exported since 1988, Z-International, a
Missouri-based label manufacturer, opened a plant in Germany in
1990. The plant now employs 12 people and invoiced over DM
4,000,000 in 1991. Company president Fritz Zschietzschmann said
that Z-International's initial motivation in setting up the plant
was to reach the European market, but now he says, "The doors to
all of Eastern Europe will be open for business."
Off-shore manufacturing requires greater investment than
licensing or joint venture manufacturing, but also affords the
greatest amount of control over operations.
Additional factors that may induce a company to set up
off-shore production include: high transportation costs,
prohibitive tariffs or duties on imports, lower production costs
and foreign government investment incentives, such as tax
holidays.
If you are seriously considering setting up an off-shore
manufacturing plant, you will need to assess whether to acquire
an existing facility or to construct a new one. The key factors
in this decision-making process are the legal and tax
ramifications, where to set up operations, and how to finance the
foreign investment. An off-shore operation may offer certain tax
benefits and other inducements for your company to make an
investment in their country.
Legal and Tax Implications
Much of the decision-making surrounding joint venture or
off-shore manufacturing involves legal and tax issues. Some
countries actively encourage and promote foreign investment.
Countries receptive to, or in need of, foreign investment may
have relaxed laws on kinds and amounts of foreign investments
allowed and may even offer certain tax benefits.
U.S. and host country attorneys and accountants should be an
integral part of the team you assemble to assess whether and
where joint venture or off-shore manufacturing would be
profitable for your company.
Location, Partner Selection and Financial Assistance
Foreign investment requires a substantial commitment of time
and money and a certain amount of risk. Recognizing this fact,
the United States government created a separate,
business-oriented agency to support American investors entering
the international marketplace.
Overseas Private Investment Corporation (OPIC)
OPIC is the lead agency assisting U.S. businesses interested
in investment overseas.
OPIC programs are available if the project:
- is a new venture, or expansion of an existing business;
- is located in a developing country where OPIC operates
(OPIC operates in 140 countries);
- will assist in the socio-economic development of the
host country;
- is approved by the host government; and
- is consistent with the economic interests of the United
States and will not have a significant adverse effect on the
United States economy or United States employment.
If your potential overseas investment fits these criteria,
OPIC can be an extremely useful resource. OPIC offers a variety
of programs, including: financing and political risk insurance
to help protect your investment and several pre-investment
services.
Pre-investment Assistance
OPIC sponsors investment missions to introduce U.S.
businesses to key foreign private sector leaders, government
officials and potential joint venture partners. Since its
inception in 1975, investment missions to 45 countries have been
organized.
SBA-guaranteed loans may be available to fund your company's
participation in such missions.
In addition to pre-investment assistance, OPIC provides
financing to assist in the setup of overseas operations and risk
insurance to mitigate some of the problems associated with
investment in developing countries.
Financing
Direct loans are available to ventures sponsored by, or
significantly involving, U.S. small businesses or cooperatives.
OPIC loans range from $500,000 to $6 million. Loan guarantees
are also made to lending institutions in the range of $2 million
to $25 million, but can be as large as $50 million.
OPIC has also underwritten a number of geographic venture
funds, including the Africa Growth Fund, the East European
Environmental Fund and the Latin America Growth Fund. If your
project fits the criteria necessary to be eligible for access
these funds, you may consider applying to the specific fund for
financing assistance.
Insurance
Private investors may be hesitant to undertake long-term
investments abroad, given the political uncertainties of many
developing nations. To alleviate these concerns, OPIC insures
U.S. investments against three major types of political risks:
inconvertibility, expropriation and political violence, including
civil strife.
Foreign Governments
Foreign governments, particularly in developing countries,
often sponsor special agencies to aid and facilitate foreign
direct investment. Some examples include the Mexican Investment
Board (MIB), the Portuguese Trade Commission and the Bahrain
Marketing and Promotions Office. These foreign investment
promotion agencies can provide detailed market information, joint
venture leads and make contacts with key officials. They often
maintain offices in the United States.
Some countries may also have special funds or financing
arrangements to spur foreign investment in particular sectors or
geographical areas. Foreign investment promotion agencies can
lead you to these sources. Contact the appropriate foreign
embassy in the United States for the name of the agency which can
assist you.
A FINAL WORD ON GOING GLOBAL
In Chapter 3, we discussed methods of market entry with an
emphasis on exporting. In this concluding chapter, we focussed
on licensing, joint venture manufacturing and off-shore
production as options to be considered along with, or in addition
to, exporting.
How you decide to enter overseas markets will depend on a
variety of factors unique to your own small business. Going
global can be a challenging experience for a small business, but
the rewards can be substantial. As Roger Teigen, 1991 SBA
Oklahoma Exporter of the Year, put it:
"There is a certain greater adulation in winning when we win
in the export market rather than when we win in the U.S. market .
. . it is exciting, it is exhilarating."
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PRODUCT DETAILS
Published: January 2007
Region: USA
Format: Editorial
SKU: infpu0001756 |
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